Lickteig v. Cerberus Capital Management, L.P.

Background

Ronald Lickteig’s agreement gave him the option to require the defendants to purchase his vested equity interests in Covis at “Fair Market Value” after his resignation. After Lickteig exercised that option, the defendants provided a valuation stating that Covis was worth $466.7 million and that Lickteig’s interests were worth $1.1 million. The parties later agreed that the defendants would pay Lickteig $1.3 million for those interests.

Lickteig alleged that the valuation contained misleading figures for Covis’s 2013 and 2014 “Adjusted EBITDA”—a company-created financial measure—and used an inappropriate EBITDA multiple. He also alleged that the defendants failed to disclose that they were negotiating with Impax and other potential buyers about selling Covis at a valuation of approximately $1 billion or more. The opinion states that Covis was later sold for $1.2 billion.

Lickteig brought claims under federal securities law and the Iowa Uniform Securities Act, along with related control-person claims. The defendants moved for summary judgment, arguing that the valuation figures and multiples were opinions they honestly held, that the alleged omissions were not actionable, and that Lickteig could not establish reliance. They also moved to exclude the proposed testimony of Lickteig’s experts, Jeffrey Ammerman and Philip Kanyuk.

Summary-judgment ruling

The court denied the defendants’ motion for summary judgment. Summary judgment is appropriate only when there is no genuine dispute about a fact that could affect the outcome and the moving party is entitled to judgment as a matter of law. The court concluded that genuine factual disputes required resolution by a jury.

For the 2013 Adjusted EBITDA, the valuation used $62.2 million, while other Covis materials used different figures, including $60 million and $78.5 million. The record did not establish how the $62.2 million figure was calculated. The court therefore found a factual dispute about whether the figure was false or misleading, whether the defendants’ use of different figures showed that the valuation figure was not genuinely believed, and whether the defendants omitted information that made the figure misleading.

The valuation used a 2014 Adjusted EBITDA of $68.5 million, based on a reduction from a $76.8 million figure for a purported “Lanoxin AG Stocking Order One Time.” Other Covis materials and the Impax negotiations used the higher $76.8 million figure without that reduction. These differences created factual disputes about whether the $68.5 million figure was false or misleading and whether the defendants failed to explain the adjustments or disclose that they used a higher figure when marketing Covis to buyers.

The valuation also used a 7.5-times EBITDA multiple. The court found factual disputes about whether that multiple reflected the defendants’ genuine view of Covis’s value and whether it was misleading to omit that the defendants were seeking a much higher multiple and had rejected an Impax proposal because it did not provide at least $1 billion for the base business. The court also noted evidence that the 7.5-times multiple was selected as a premium over an earlier valuation without a specific valuation rationale.

The court rejected the argument that Cerberus’s internal “Marks”—quarterly investment valuations prepared under its valuation procedures—conclusively established Covis’s fair market value or the defendants’ beliefs. A jury could find that those valuations served a different purpose, were intentionally conservative, or were not considered by the people who prepared Lickteig’s valuation.

The court separately found that a jury could find Lickteig relied on the valuation. He sent an email stating that he would agree to sell his interests for $1.3 million based on the valuation and his conversation with Dean Mitchell. Whether that reliance was reasonable, including in light of Lickteig’s financial experience and access to other information, was a factual question for the jury rather than the court on summary judgment.

Expert testimony

The court denied the defendants’ motion to exclude Philip Kanyuk’s testimony. Kanyuk proposed to testify about the fair market value of Lickteig’s interests. The court found that he was qualified, used valuation methods recognized by the American Institute of Certified Public Accountants, relied on sufficient financial information, and would assist the factfinder. The defendants’ challenges to the financial information and comparable companies concerned the weight and credibility of his testimony, not whether it was admissible.

The court also denied the defendants’ motion to exclude Jeffrey Ammerman’s testimony. Ammerman performed a preliminary valuation for Piper Sandler in connection with Impax’s potential purchase of Covis. He relied on Covis financial information, analyzed comparable public companies and specialty-pharmaceutical transactions, and helped produce an initial valuation range that led to Impax’s nonbinding $950 million indication of interest. The court found his methods reliable and his testimony potentially helpful in explaining what information Covis gave a prospective buyer and how that information was used. The court concluded that the testimony’s limitations could be addressed through cross-examination and other evidence.

Disposition

Judge Gregory H. Woods denied the defendants’ motion for summary judgment. He also denied the defendants’ motions to exclude the testimony of Jeffrey Ammerman and Philip Kanyuk. The opinion did not decide whether Lickteig ultimately proved his claims; it held that the disputed issues should be resolved by the factfinder.